Where does this go?

[Bonzo]

Here's a picture of the CVH Starter ( Original Ford unit )



The large teminal ( Red Arrow ) Should go straight to the Positive terminal of the battery ( 12v + )

The smaller terminal ( Black Arrow ) Should go to to the ignition switch ( 12v +, switched live )
Black/Blue wire.

Nothing goes to the Third terminal, other than the motors winding live feed wire from the solenoid ( Pictured )

The starter will get it's earth from a earth wire from the battery to one of the starters mounting bolts or other nearby location on the engine block.

I know it won't help with the strange reading that you are getting from the ignition switch but shoud hepl to confirm if the starter is wired correctly